Market Structures Economics Quiz

Perfect Competition

• A firm in a perfectly competitive market is a price-taker, meaning it has no control over the market price.
• The short run equilibrium of a firm under perfect competition is achieved when the firm maximizes its profit by producing the level of output where marginal revenue equals marginal cost.
• The profit maximization principle is achieved when the firm's marginal revenue equals its marginal cost.
• In the long run, the firm will continue to produce as long as the average revenue is greater than or equal to the average cost.

Monopoly

• A monopoly is a market structure in which a single firm supplies the entire market with a particular good or service.
• The sources of monopoly power include:
  • Government grated monopoly
  • Ownership of a key resource
  • Patents and copyrights
  • High barriers to entry
• The short run equilibrium of a firm under monopoly is achieved when the firm maximizes its profit by producing the level of output where marginal revenue equals marginal cost.
• The long run equilibrium of a firm under monopoly is achieved when the firm's marginal revenue equals its marginal cost, and the firm has no incentive to change its price or output.

Monopolistic Competition

• Monopolistic competition is a market structure in which many firms produce differentiated products that are close substitutes for each other.
• The features of monopolistic competition include:
  • Many firms and free entry
  • Product differentiation
  • Non-price competition
  • Excess capacity
• The short run equilibrium of a firm under monopolistic competition is achieved when the firm maximizes its profit by producing the level of output where marginal revenue equals marginal cost.
• Excess capacity is a characteristic of monopolistic competition, where firms produce below their capacity to maintain prices and avoid competition.

Advertising

• Advertising has both positive and negative impacts on the economy:
  • Positive impacts: increased consumer awareness, increased competition, and economic growth
  • Negative impacts: misleading information, waste of resources, and barriers to entry

Oligopoly

• Oligopoly is a market structure in which only a few firms compete with each other.
• The features of oligopoly include:
  • Few firms and high barriers to entry
  • Interdependent decision-making
  • Non-price competition
• Oligopoly markets can be either collusive or non-collusive:
  • Collusive oligopoly: firms cooperate to maximize joint profits
  • Non-collusive oligopoly: firms compete with each other

Capital Budgeting

• Capital budgeting is the process of evaluating and selecting investment projects that are profitable for the firm.
• The steps in capital budgeting include:
  • Project identification
  • Project evaluation
  • Project selection
  • Project implementation
• The importance of capital budgeting lies in its ability to maximize the firm's value and profitability.

Pay Back Period Method

• The Pay Back Period Method is a capital budgeting technique that evaluates projects based on the time it takes to recover the initial investment.
• The advantages of the Pay Back Period Method include:
  • Easy to understand and calculate
  • Focus on liquidity
• The disadvantages of the Pay Back Period Method include:
  • Ignores the time value of money
  • Does not consider the project's profitability

Net Present Value Method

• The Net Present Value Method is a capital budgeting technique that evaluates projects based on their present value of future cash flows.
• The Net Present Value Method is considered a superior technique because it:
  • Considers the time value of money
  • Evaluates the project's profitability

Internal Rate of Return Method

• The Internal Rate of Return Method is a capital budgeting technique that evaluates projects based on the rate at which they generate returns.
• The Internal Rate of Return Method is considered a superior technique because it:
  • Considers the time value of money
  • Evaluates the project's profitability